First Time Home Buyer: High amount of rentals in a Condo affect decision to buy?

Asked by Cj, Chicago, IL Wed Feb 18, 2009

Hi guys,
Does/should a condo having a large number of units being rented have an impact on my decision to buy? i do not have exact numbers, but I've heard that many of the units have been rented out and not sold. Is there a certain precentage I should look for? Its seems that the assessments are still being paid by the owener, so i'm not sure what the issue would be/???/

Any advice would be great!!

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Christopher…, Agent, Chicago, IL
Wed Feb 18, 2009
Dear CJ,

The essential issue is that most lenders (conventional) will not lend in a building that has too high a concentration of renters as a percentage of all units. 10% rented is probably the most conservative and widely used number, but with lending and underwriting guidelines tightening, it is probably a safe percentage to use.

The other obvious issue for you as a buyer is that if for some reason in the future you need to rent your own unit rather than sell it- if you are already in a building that has a relatively high percentage of rentals then you might be restricted by your condo association from renting your own unit. In the case of a very poor seller's market (i.e right now), you want to have all options available to you with respect to "getting out from under" a property. Thus you may want to consider a building with as low as possible a rental to owner percentage. Good luck.

Christopher Thomas
Broker Associate, Sudler Sotheby's International Realty
773-418-0640 (cell)
2 votes
JonTheBanker, , Chicago, IL
Wed Feb 18, 2009
Hi CJ,

Yes, it should definitely impact your decision. Assessments being paid by the owner will not be an issue regarding your purchase of that unit. That is what the owner is supposed to do even if renting that particular unit to another party.

I can tell you the issue is mostly related to financing. If you are a cash buyer, then half of the problems and issues are negated. Different banks/investors have different requirements depending upon the individual risk assement by that bank/investor. Fannie Mae may say less than 50% is OK. But bank/investor A may set more restrictive rules in addition to Fannie/Freddie rules in that no more than 10% investor concentration is allowed, Bank B 20% and Bank C 25% for example purposes. As far as which percentage investor concentration should be considered when attempting to narrow down from which condo project you would purchase depends much upon your timeframe to purchase. If buying within a month, likely the 50% investor concentration rule is still available with a couple of banks so you could search through quite a few additional condo projects that have higher rental percentages. If 6 months is your time frame, be conservative and waive at 10%. The reason being is this high percentage investor concentration of 50% which is still available now (a "window" of opportunity we'll call it) will narrow as time passes and may become much more restrictive...and that's due to all of the issues prevelent within the markets of which you already know (economic downturn, liquidity crisis, subsequent housing declines etc).

Have your realtor or attorney (or yourself) contact the association or management office - of a project retaining a unit in which you are interested purchasing - to confirm in advance what the rental percentage is. It may not be completely accurate but if the building is 30% rented due to sales lag, it may be time to consider other projects.

It would be to your advantage to work with a correspondent mortgage lender such as us when the time comes. Therein lies the ability for the multiple investor relationships to be sifted through in order to isolate a product or program that will accomodate financing of the project without issue. Hope this helps. We appreciate you as a customer and consumer alike and look forward to helping any way we can. Contact me if needed CJ.
1 vote
Evan Kane, Agent, HIGHLAND PARK, IL
Wed Feb 18, 2009
Having a large number of the units rented is not ideal, but it is better than having a large number of foreclosures. Plus, if owners can rent the units instead of selling at deflated prices all the units should be holding their value fairly well.
1 vote
The Kombrink…, Agent, St Charles, IL
Wed Feb 18, 2009
The answers so far have been great advice. I would just throw in that the rental market right now is very active so that would skew the percentages a bit.
0 votes
Evan Kane, Agent, HIGHLAND PARK, IL
Wed Feb 18, 2009
True that FHA and VA wouldn’t approve the loan but chances are the building isn’t FHA or VA approved anyway. It would be very unusual for the owner occupancy to have any impact on non FHA or VA financing.
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0 votes
Jim Starwalt, Agent, Grayslake, IL
Wed Feb 18, 2009
Dana is correct! FHA will not approve a loan for a property in this situation, as well conventional financing is pretty as tough in this situation.
0 votes
Dana Schuster, Agent, Slidell, LA
Wed Feb 18, 2009
The drawback is that it can affect your financing. some lenders willl not finance if the owner/renter ratio is too high. FHA will deny on this basis.
0 votes
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